Whether short term rates are high today is one of the louder debates among economists. And why are long rates so low? Will an inverted yield curve mean what it has for the past 40 years, i.e., a slowdown and/or a recession?
This week's letter is a recent essay by Bill Gross, the Managing Director of Pimco, also known as the Bond King. Gross sits on top of the largest pile of bonds in the world. He thinks short term rates are high and nearing a peak for this cycle and that the economy will begin to slow down next year. He includes the main points, sent to their investment committee, which Pimco is looking at when viewing the bond market.
Will he be correct in his assessment of rates? When someone as large as Pimco offers their view of the market, we should keep an eye on them and that is why this was picked for Outside the Box.
This week's commentary comes from Douglas Greenig of RBS Greenwich Capital in Greenwich, CT. I have been reading his material over the years and always find it solid and thought-provoking.
In this piece, we get one more look at Greenspan's "Conundrum." Douglas looks at some of Greenspan's arguments for the strange behavior of the bond market. He then offers up his own theory of why long rates have stayed low and why they are likely to remain there. Many market watchers, like Bill Gross of PIMCO, are starting to look at why long rates have stayed low and predicting they could go much lower. Douglas offers up some new ideas and that is why it was picked for this week's Outside the Box.
This week's research comes once again from the GaveKal Ad Hoc Comment publication, however this piece was done by Anatole Kaletsky, a different analyst than the previous reports we have highlighted. This group is located in Hong Kong and I always find their comments on Asia very insightful.
The report takes a look at some of the structural players in the U.S. bond market and why their actions may be causing the longer term bond rates to stay low. The largest catalyst surprisingly is Japanese private purchasers of US bonds. The reasons are not the subject of work I have read elsewhere and they will continue to buy until conditions improve in Japan's investment markets. This is a different look at the issue than you see from most economists and why I chose it for this week's Outside the Box.